Inherited 401(k) by a niece
Aunt died at 54 without a will.
By state law, her niece became the heiress of the aunt’s 401(k).
The niece is the estate administrator at the same time.
Aunt’s 401(K) has been distributed to the order of the estate administrator.
The niece wants to open an Inherited IRA account to deposit the checks not paying tax now.
Is it possible?
If it’s not, what’s tax consequences?
thank you!
Permalink Submitted by Alan Spross on Tue, 2008-08-19 04:56
It was an error to allow the 401k to be fully distributed, since the distribution renders the full amount taxable in the year of distribution. No rollover is possible here, but the death benefit might have stayed in the plan longer.
Since the niece was NOT a designated beneficiary, there is no option for the direct rollover to an inherited IRA for her, and the 5 year rule would apply to direct distributions from the plan. However, taking the distribution over 5 years is preferable to being hit with all the income in a lump sum, possibly triggering a higher marginal tax rate and eliminating any limited tax deferral available over the next 4 years.
At least, as the estate administrator AND beneficiary under state intestate provisions, no one will be yelling at her for this. Although, if she feels that the plan did not provide her with proper information, she may have a complaint with the plan administrator. I suppose the amount of the distribution determines the gravity of this development.
Permalink Submitted by [email protected] on Tue, 2008-08-19 15:07
Thank you, Alan!
If it’s the case, how will the niece be paying taxes.
Aunt will pay tax on the distribution on her Form 1041.
The rest of the money? Is it taxable income to the niece?
Thank you!
Permalink Submitted by Alan Spross on Tue, 2008-08-19 22:18
Income including the 401k distribution paid to the estate would be reported on the estate’s 1041. Since estate income tax rates are high, the income is usually passed through to the beneficiary (niece) on a K1 and is reportable on the niece’s 1040 at whatever her marginal tax rate is. She should check the records to see if perhaps any of the 401k funds were “after tax”, ie tax free upon distribution.